This commentary is intended for professional investors only within the meaning of MiFID II.
Government and central bank stimulus packages have prevented market dislocation.
- Liquidity remains a major issue and adversely impacts valuations
- We remain cautious in the equity and emerging markets and favour investment grade corporate bonds and financial subordinated securities.
COVID-19 ASSESSMENT
To date, the health situation has been evolving without much surprise. Although some scepticism concerning the current state of the epidemic in China is necessary, it seems that Europe, especially Italy and Spain, drew the necessary conclusions from the Chinese situation. The United States is now preparing adequately to face the peak of the epidemic within the next two weeks.
WHAT WILL BE THE ECONOMIC CONSEQUENCES OF THIS HEALTH CRISIS?
For economists, it is time to assess the cost of the crisis, its impact on the balance sheet of banks and that of businesses, sector by sector, and of course on public deficits. These estimates, as well as the impact on households via the unemployment rate, are to be modelled according to the budgetary stimuluses already announced as well as the social shock absorbers which vary enormously from one country to another. The scenarios anticipate a global recession in 2020 despite a vigorous economic rebound between April and July, depending on the speed of deconfinement of each country. The forecasts are between -2.7% and -4.5% for the Euro zone, -2% and -6.4% for the US, between + 1.5% and 0% for China which would result in negative global growth in 2020 of approximately -2.5% on average1.
From a political point of view, in the euro zone, the speed of budgetary commitments has been beneficial, but we may regret that the euro zone seems to have once again missed a chance to evidence real cohesion. We anticipate that the stimulus packages will go beyond recent announcements and we can only hope for some large scale coordinated actions, which could mark a turning point in terms of European coordination
CENTRAL BANKS’ INTERVENTION
The intervention of central banks will have been effective in avoiding the total dislocation of the markets. They evidently remain fragile and liquidity is persistently very low in most asset classes, from those typically characterized as illiquid to certain government debt markets, such as Italian or Spanish debt on which transactions of a few million euros are still difficult to execute.
WHAT IS THE RIGHT POSITIONING?
After the shock, the forthcoming period will require the valuation of each asset class according to the specific consequences of the crisis. It seems to us today that the rebound in the equity markets, which in the United States far exceeded the lows of December 2018, is excessive. We also continue to be cautious about emerging countries, which will continue to be affected by various adverse factors. On the credit market, we favour the financial subordinated debt market as well as the Investment Grade segment on which the primary market is reopening and offers real opportunities, as it was the case in January 2009 at the end of the crisis financial.
Completed by Jean-Luc Hivert, Chief investment officer of LFAM, on April 1st, 2020